The following is a prior exchange between me and a family member of a client of mine. After discovering it in my email inbox again recently, it seemed to me that it would be useful to share with more than just my counterpart in the exchange. The discussion is around his potential purchase of property in CA and he’s only bouncing ideas off of me since I am not licensed in CA, but up in WA State. He’s aware that licensing for different areas means there are several items I cannot speak on with regard to their contracts, laws, etc. But, this exchange (start from the bottom up) was a good example of what we discuss here with client when they’re considering buying owner occupied rental property. It’s a bit long, but worth the read. Enjoy!
I’m glad you found it useful. If your area has a landlord/tenant type organization similar to the Rental Housing Assoc. up here, they often teach these types of classes. I found this already on the City of Oakland website: http://www2.oaklandnet.com/Government/o/hcd/s/LandlordResources/index.htm
Definitely have been enjoying the sun but need to be out enjoying it more – had a much too long band rehearsal yesterday (1130-6) that took up more sun time than I wanted. 🙂 But, it’s gorgeous again today…
My blog also frequently has information about rental property and other tips for landlords that can be of help understanding issues, but it’s geared toward WA only. If you can find something similar for your area, it may be a good resource. Here is a sample of an article I’ve written: https://teamreba.com/2008/05/13/20-questions-for-hiring-a-rental-property-management-firm/
Take care and good luck with this one! Let me know if you have any other questions.
Cheers,
Reba Haas
Team Reba of RE/MAX Metro Realty
—–Original Message—–
From: Peter
Sent: Monday, May 06, 2013 9:13 AM
To: Rebecca Haas
Subject: Re: Oakland Houses
Wow! Thank you so much for the detailed response, Reba. I’m thinking of looking for a class or two on the ins and outs of being a landlord, but this outline is terrific help to get me started.
Hope you’ve been doing well and are enjoying all the recent Northwest sun!
All the best,
Peter
Hi Peter,
Taking on a duplex has, like anything, pros and cons. Depending on the difference of price and what you can get for rent then it can often be a nice offset to you paying the full mortgage and/or provide some additional income while allowing other write offs on your taxes (as long as your income qualifies).
Here are some considerations and I’ll split them out in two scenarios:
If it’s currently rented (1 or both sides):
”¢ The contract should stipulate that you get to review any outstanding leases and the terms therein and agree to those terms because you’ll be taking them over.
Ӣ If you need a tenant to move out to allow occupancy for you, then you should decide which unit you intend to reside in and put a requirement in the contract with the seller for them to give that tenant notice. Otherwise you wait till you close then YOU have to give them notice and then wait another 30 or so days for them to vacate.
Ӣ If one of the units is already leased, then be asking your mortgage broker about the difference (if any) in down payment required from you and any other qualifying standards. Typically rentals only have about 75% of the actual rent applied to help offset the debt to income ratios.
If it’s not rented out at all:
”¢ The lender will look to you for 100% of the qualifying of the payment. If you can easily and comfortably do this, then that’s good and having a renter will help you offset your costs.
”¢ If you’ve never been a landlord before, you’ll need to get familiar with the laws for your State and local city to find out if there are any special considerations you’ll need to have when renting.
”¢ Being a landlord requires that you be responsible for following Fair Housing laws and much more, so don’t just grab any lease off the internet and do proper interviews with prospective tenants. Usually you have to get a membership or find someone who can do the credit/background checks needed for vetting out a tenant. I use here in WA the Rental Housing Association of Puget Sound (www.rha-ps.com) and I’m sure there is something similar in your area. Landlord/Tenant rights can be a big deal, and they’re tough on landlords in Seattle, so be sure you’re comfortable with being a landlord.
Other considerations:
Ӣ Are the utilities split on the units so that a tenant would have to pay their own? If not, then be sure to set up rents that allow a comfortable margin for increased utility costs. The current owner should be able to provide those as part of the financial due diligence of your contract.
”¢ Be aware that in many municipalities that you must hold trust funds of a tenant’s deposit outside of your personal banking accounts. I have a separate account entirely for my rental properties.
I’m a fan of people using rental property to increase their net worth and offset their income ”“ I do it myself and have 6 units currently being rented. Some are easier to handle than others as my duplex has very easy tenants who pay all their utilities, pay rent on time, and they’ve been there for years. My 4-plex is a higher turnover property so it takes more money, even though rents are lower, but I keep an apartment there so even if it breaks even, it’s cheaper than me spending money on hotels when I see my family and I get tax write offs.
Be aware that if things go wrong in the other unit, you’re the one in many cases paying for the repairs. But, if the damage is a direct result of the tenant you may be able to have them cover the costs. I also recommend renter’s insurance as a requirement of tenants at certain properties.
Cheers,
Reba Haas
Team Reba of RE/MAX Metro Realty
—–Original Message—–
From: Peter
Sent: Sunday, May 05, 2013 3:36 PM
To: Rebecca Haas
Subject: Oakland Houses
Well it has been a bit of a crazy ride down here in the bay, Reba, but I’m once again thinking about making an offer on a house down here. I’m a little concerned though only because the property I’m currently looking at is a duplex with some income potential, and I really have very little idea about how I should think about this new sort of scenario (the loan would be for around $150,000 more than my previous cap).
I’ve talked with my broker of course, but it would also be nice to hear your educated and unbiased opinion. If you might have just five or ten minutes to chat this week (or maybe this is something we could just chat about thru email?), I would greatly appreciate your time.
Thanks so much,
Peter
